Signs of Spring for Transportation?

As Federal Reserve Chairman Ben Bernanke talks about “green shoots” sprouting in some financial markets, inventories might be ripe for restocking.

The first earnings reports are due for 2009 and feelings are mixed on whether the economy has bottomed out and will start recovering. Ben Bernanke, chairman of the US Federal Reserve was widely quoted talking about green shoots emerging in some financial markets, then a dismal jobs report undermined much of the optimism linked to Bernanke's remarks. While the Fed Chairman speaks in broad economic terms, stating that the pace of the economic decline will now begin to moderate, the transportation industry may have seen some of that effect already.

We have been in this freight recession far longer than we have been in this economic recession,” said John Larkin, Stifel Nicolaus. Speaking to the Ontario Trucking Association, Larkin observed, “We believe that things are relatively close to the bottom now. The precipitous drop off that we had seen in the fourth quarter of 2008 has reached some level of stability, perhaps beginning to stabilize in December and January, and leveling off more in February and March.” He added, “We are, more or less, trolling along the bottom at a steady pace.”

What does it take to get things off the “bottom” Larkin describes? Part of the answer rests with credit markets and the financial sector Chairman Bernanke was expressing some limited optimism about. Credit has to begin flowing not only for consumers but for manufacturers and retailers. On the consumer side, increased confidence and access to credit will drive demand. For businesses, recent months have been spent running down inventories. In Larkin's words, “As inventories become fully de-stocked, and as banks begin to lend again, we will see, at least, a partial recovery. This should help to make things feel a little bit better by the end of the year, even if we are not, at that point, out of the 'economic woods.'”

”In the US, one of the easiest ways to generate cash and reduce your need for credit in a tight credit environment is to de-stock your inventories aggressively,” said Larkin. “Certainly we have seen a lot of aggressive action there. This may explain why transportation volumes seem to be off 15% to 20% now. Many [firms] are drawing down their inventories and not necessarily ordering new products or replenishing those inventories.” Larkin continued, “There is a limit to how far inventories can be de-stocked. Once those inventories get destocked, then the material in the supply chain will reflect the reduced demand but, in theory, no additional destocking.”

Larkin notes that inventories on the retail side have come down, but not as dramatically as manufacturing inventories. As retailers move into a seasonal stock change, they are likely to be very cautious in ordering, holding volumes down to avoid accumulating unsold inventories that would have to be liquidated at the end of the season. “We have heard that many retailers are reducing their orders for this season as much as 20%, which obviously has a hugely negative impact on freight volumes,” observed Larkin.

Supply chain network optimization efforts which began with high fuel prices in 2008 have not been abandoned, and manufacturers are still focusing on producing products that reduce transportation costs. That means smaller and lighter shipments, but it goes further, says Larkin. Many firms are also asking strategic questions, like whether they are using the right suppliers, and whether those suppliers are in the most ideal locations. “A significant amount of re-tooling of those supplier-customer relationships is going on as a result of these questions, even the locations of manufacturing plants and distribution centers are all up for review,” Larkin notes.

Describing the debate over how much more inventory can be stripped from supply chains, Larkin points out that some carriers are already reporting some restocking impact on their freight volumes and Larkin suggests that within the next three to six months carriers could bounce back a little based on increased transportation demand for manufactured products.

Meanwhile, carriers are also dealing with the effects of shippers optimizing their modal mix to reduce costs. They are trading service for a lower cost as shipments move from air to ocean or domestic ground services and less-than-truckload shipments are consolidated into truckload, etc. Larkin ponders a potential longer term impact as shippers discover improved service levels in the lower cost modes and they begin to reevaluate whether or not they are paying too much for too high a service.

Also with a view to the future, Larkin points to the 15% contraction in the truckload industry in recent years. Volume drops in early 2009 would appear to indicate there is still excess capacity in the market, he notes. But in both the truckload and less-than-truckload sectors, he doesn't see future capacity being a problem.

Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish